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Insolvency (BIA) - Property Stay. Phillips v. Kheil
In Phillips v. Kheil (Ont CA, 2026) the Ontario Court of Appeal dismissed an appeal, this brought against "a judgment which dismissed his action against the respondents (the “Action”) on the basis that he was an undischarged bankrupt at the relevant time and thus lacked capacity to commence it".
The court considers the meaning of 'property' in the BIA, here in the context of an exception to the litigation stay:A. Relevant statutory provisions
[15] Pursuant to s. 71 of the BIA, following the filing of an assignment in bankruptcy, all property of the bankrupt vests in the trustee in bankruptcy and the bankrupt has no capacity to deal with their property:71. On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer. [16] The term “property” is defined broadly in s. 2 of the BIA and has been interpreted to include tort and contract claims in relation to property: Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701, at para. 41. Therefore, the bankrupt person loses the capacity to commence legal proceedings in relation to their property, which must, instead, be brought by the trustee. This is made explicit by s. 30(1)(d) of the BIA which grants the trustee (with the permission of any inspectors appointed by the creditors) the authority to “bring, institute or defend any action or other legal proceeding relating to the property of the bankrupt”.
[17] At the same time, certain claims are so inherently personal in nature that they do not form part of a bankrupt’s property that is vested in the trustee. This would include claims for such matters as physical injury, mental distress, or loss of reputation, which may continue to be pursued by the bankrupt in their own right: Wallace, at para. 38; Meisels v. Lawyers Professional Indemnity Company, 2015 ONCA 406, 126 O.R. (3d) 448, at para. 13. Such personal causes of action are excluded from the property that is vested in the trustee because “it is not the policy of the law to convert into money for the creditors the mental or physical anguish of the debtor”: Re Holley (1986), 1986 CanLII 2586 (ON CA), 54 O.R. (2d) 225 (C.A.), at p. 240.
[18] Also relevant is s. 30(1)(l) of the BIA, which, as noted above, authorizes the trustee to “appoint the bankrupt to aid in administering the estate of the bankrupt in such manner and on such terms as the inspectors may direct”. Courts in Ontario as well as other provinces have held that a trustee may assign a bankrupt the authority to commence legal proceedings, but in all such cases cited by the appellant this has been done through an express authorization or assignment: see e.g. Stec v. Blair, 2021 ONSC 6212, 93 C.B.R. (6th) 217, at paras. 10-12; Blackmore v. Abdi, 2019 ONSC 4550, at paras. 21-22, 33-34; Spiroulias c. Chriscon Investments Ltd., 2006 QCCS 2019, 34 C.B.R. (5th) 69, at paras. 7, 23, 31; and Kirschner v. Moore, 2023 BCSC 450, at para. 35.
B. The motion judge did not make a palpable and overriding error in finding that the Trustee did not assign the authority to commence the Action to the appellant
[19] The motion judge accepted that s. 30(1)(l) of the BIA permits a trustee to assign a bankrupt person the right to commence a legal proceeding in respect of the bankrupt’s property. However, the motion judge found that no such assignment was made by the Trustee in this case because the Trustee was unaware of the Action and never granted the appellant the right to commence it – either before it was brought, or retroactively to cure the procedural defect. This was a finding of mixed fact and law reviewable on a standard of palpable and overriding error.
[20] The motion judge did not err in this finding. As noted above, those cases which found that a trustee assigned the right to commence legal proceedings to a bankrupt person featured an express authorization. Requiring the authorization to be express rather than implied is consistent with the wording of s. 30(1)(l), which grants the trustee authority to “appoint the bankrupt … in such manner and on such terms as the inspectors may direct”. The trustee can only “appoint” the bankrupt by taking some positive action authorizing the bankrupt to commence proceedings, as opposed to merely acquiescing in the bankrupt’s decision to commence a legal action. Further, in situations where the creditors have appointed inspectors, the bankrupt’s appointment is on terms directed by the inspectors, which could only be the case if the appointment is made expressly.
[21] This interpretation of s. 30(1)(l) is consistent with a key underlying purpose of the BIA, namely, to ensure equitable distribution of the bankrupt’s assets among their creditors: see Aquino v. Bondfield Construction Co., 2024 SCC 31, 496 D.L.R. (4th) 613, at para. 36. A trustee’s responsibilities and powers under the BIA are intended, in part, to protect the interests of the creditors: GMAC Commercial Credit Corporation — Canada v. T.C.T. Logistics Inc., 2006 SCC 35, [2006] 2 S.C.R. 123, at para. 58. Commencing, continuing, or defending a legal proceeding may require the payment of legal fees and expenses and/or affect the bankrupt’s entitlements and liabilities, including exposure to costs orders. This could, of course, enhance or jeopardize the bankrupt’s assets available to the creditors to settle the bankrupt’s debt. Requiring the bankrupt to obtain the express permission of the trustee in order to institute, continue, or defend legal proceedings related to their property ensures that the interests of all stakeholders have been properly taken into account.
[22] There is no dispute that no such express authorization was provided by the Trustee in this case. As the motion judge pointed out, the Trustee was not even aware of the fact that there had been a fire at the Property, let alone that the appellant was seeking to recover damages for the loss suffered in a legal action. Thus, while the Trustee may have acquiesced in the appellant continuing to manage the Property, this acquiescence was not sufficient to “appoint” the appellant to commence the Action pursuant to s. 30(1)(l). Therefore, the motion judge did not err in finding that the appellant lacked the legal capacity to commence the Action.
C. The motion judge did not make a palpable and overriding error in holding that the appellant’s claim for general damages for loss of enjoyment and use of the Property was a proprietary claim rather than a personal claim
[23] The motion judge found that the appellant’s claim for general damages relating to his loss of enjoyment and use of the Property was proprietary in nature. Because it was not a personal claim, it was not excluded from the property vested in the Trustee and the appellant lacked the capacity to commence proceedings in respect of such a claim.
[24] The motion judge’s characterization of the general damages claim as proprietary rather than personal is one of mixed fact and law reviewable on a standard of palpable and overriding error. I see no such error in the motion judge’s findings.
[25] The motion judge determined that there was “no aspect of damages claimed which would be personal to the [appellant] and therefore exempt from bankruptcy proceedings”. A review of the appellant’s statement of claim confirms this conclusion. The damages that the appellant particularized in his statement of claim are suffered by the Property, rather than the appellant personally. These include replacement of a roof; remediation of physical building elements, electronic components, and smoke and water damage; lost profits; and rent arrears.
[26] There is no standalone personal claim, such as a physical or psychological injury, at issue in this case. The appellant did not plead any facts which allege substantial and unreasonable interference with his health, comfort, or convenience: see Antrim Truck Centre Ltd. v. Ontario (Transportation), 2013 SCC 13, [2013] 1 S.C.R. 594, at paras. 21-23.
[27] The fact that the appellant had possession of the commercial units following the fire does not transform the claim into a personal one, since the damage alleged still relates to the real property, which was vested in the trustee at the relevant time. The appellant’s Action cannot be saved by a nuisance claim which could, in other circumstances, be a personal claim, because in the context of this case it is clearly rooted in proprietary loss which is suffered by the estate in bankruptcy: see Little (Nautilus North Strength and Fitness Centre) v. Bramcan Investments Limited, 2025 ONCA 86, 21 C.B.R. (7th) 236, at para. 9.
[28] The motion judge did not make a palpable and overriding error in her characterization of the appellant’s claim, and the appellant’s motion seeking to amend his claim to add the claim in nuisance was properly dismissed. . Grillone (Re)
In Grillone (Re) (Ont CA, 2024) the Ontario Court of Appeal notes the effect of a bankruptcy stay [under BIA s.71]:[5] The October 2023 bankruptcy order was automatically stayed when the appellant appealed it, but this stay was lifted by Brown J.A. in December 2023. As a result, under s. 71 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3, the appellant has no capacity to dispose of or otherwise deal with his property, which passed to and is vested in the Trustee.
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